Against the Odds: Removing Barriers to Optimising LiquidityHelen Sanders, Editor, TMIIrrespective of the degree of centralisation within a group, it is possible to achieve substantial liquidity improvements, together with reduced costs and better visibility over cash and risk - as shown by these three case studies.

Against the Odds: Removing Barriers to Optimising Liquidity

by Helen Sanders, Editor

At BNP Paribas’ recent Cash Management University (CMU), Vinci Finance International, Holcim Ltd and DFDS each described recent projects that they had undertaken to optimise liquidity, either regionally or globally. Companies of all sizes are very aware of the value of liquidity; however, implementing a regional or global liquidity management strategy can appear particularly challenging in companies with a decentralised organisational structure. As these three companies’ experiences illustrate, however, companies with differing degrees of centralisation have comparable opportunities to optimise liquidity, so long as treasurers seek to deliver value at both a group and subsidiary level.

Experiences of a decentralised treasury: Vinci

Jean-Michel Harlepin, Vinci Finance International, (Vinci), a 100% subsidiary of leading concessions and construction group VINCI SA, opened the workshop by outlining how treasury has sought to optimise liquidity management in a decentralised business organisation. Vinci was established in 2008 to facilitate intercompany financing and cross-border cash pooling; however, business units operate on a decentralised basis, so treasury needs to work with each one individually to demonstrate the benefits of a consolidated approach to group liquidity and encourage them to participate in liquidity management structures.

Optimising and securing access to group liquidity is a major objective for Vinci’s treasury team. In particular, treasury aims to achieve greater visibility and accessibility of cash worldwide, to minimise the cost of borrowing and therefore improve group results, reduce counterparty risk, and increase shareholder and rating agency confidence. A vital means of achieving this is to centralise cash wherever possible. Over the past two years, therefore, treasury has implemented a number of cash pools across its global footprint, working with seven partner banks across 120 accounts. In most cases, zero-balancing cash pools have been set up, e.g., in the Eurozone, UK, Poland and Czech Republic, with Romania to follow shortly. Although zero-balancing remains the preferred means of optimising liquidity, Vinci has also set up notional pooling in Switzerland, North America and parts of Asia where it may not be feasible or desirable for group entities to use zero-balancing.

In addition to the single currency zero-balancing and notional cash pools, Vinci has set up multi-currency notional cash pooling, denominated in euro. This allows group liquidity to be managed via a single, base currency account and reduces the need for FX swaps for currency conversion, therefore removing operational workload and risk. The multi-currency cash pool enables subsidiaries located in countries where zero-balancing cash pooling (such as Canada, United States and Switzerland) is either challenging or not permitted to be included, so long as subsidiaries are able to open a bank account in the Netherlands and transfer funds.

A compelling value proposition

As a decentralised business without a mandate to enforce cash centralisation, treasury has worked proactively with subsidiaries (of which there are over 2,500 in 100 countries) to convince them of the benefits, address any concerns and set up the relevant documentation, including international cash agreements and bank contracts according to Vinci’s legal requirements. Vinci’s subsidiaries maintain their own bank relationships locally, so it has been challenging at times to accommodate local banking requirements and relationships whilst connecting the subsidiary into a wider zero-balancing or notional cash pool.

Key to the value proposition for subsidiaries is that they benefit from improved financial conditions (such as lower financing rates and better investment yield) and reduced counterparty risk. Subsidiaries no longer need to manage their daily cash position, and bank relationship management is more straightforward as a result of harmonised bank conditions and a centrally-negotiated legal contract. By reducing the amount of time spent on daily cash management, subsidiaries can spend more time on medium-term cash flow forecasting that brings more strategic benefit.